Academic journal article Risk Management and Insurance Review

The Evolution of the Role of Risk Communication in Effective Risk Management

Academic journal article Risk Management and Insurance Review

The Evolution of the Role of Risk Communication in Effective Risk Management

Article excerpt

ABSTRACT

Risk management has evolved significantly over the past decades causing dramatic changes in the communication channels required to effectively handle the ever-changing risks a firm faces. The first generation of risk management dealt primarily with risks inside a company creating a need for internal risk communication. The second generation, which arose with the growth in third-party liability claims, involved many more stakeholders external to the company and forced the risk management function to deal with communications to these external parties. The third generation, which began as an expansion of the external risks that firms are exposed to, involves the board and senior management in the risk communication function.

INTRODUCTION

Risk management as it exists today is distinctly different from 50 years ago: it has progressed from dealing primarily with risks inside a company to an approach that integrates the risk management function into the broader strategic objectives of the organization. Perhaps the most obvious changes that have occurred involve the scope of risks addressed and the increased sophistication of financing methods employed by risk managers. However, the broadening scope of risk management also has been accompanied by an evolution in the role that risk communication plays relative to the past. Today, the fact that risk communication is and always will be vital to a successful risk management program is evident to a growing number of stakeholders. Not only have the quantity of information, the quality of information, and the parties involved in communication changed, but there is a general recognition that risk communication itself is an important tool in effectively managing risk.

While Powell and Leiss (1997) deal primarily with the dissemination of technical information to the public, the concept of risk communication can easily be extended even further to include the ever-growing needs of a corporation to provide timely information to its stakeholders in this age of renewed corporate governance. The gap in understanding between the senders and intended recipients of a risk message is what Powell and Leiss have termed the "risk information vacuum." Effective risk communication can be utilized to fill this vacuum and translate the language of experts into something the public can more readily understand.

In this article we describe the progression of risk management over the past four decades, focusing on the evolution in risk communication and the expansion of companies' focus from primarily internal risks to a view that includes external stakeholders. The next section describes the first generation of risk management,1 which relied primarily on internal risk communication. The following section moves into the second generation, which saw a myriad of external stakeholders present important considerations for the risk management function as well as the application and development of a broad menu of risk-financing tools. This is followed by a discussion of the third generation-the era of "enterprise risk management"-which is defined by an expansion of intra-firm communication but simultaneously is characterized by further expansion in the scope of external risk communication. The next section offers some observations about the continued progress of risk communication as it has evolved in the third generation and speculates about what the fourth generation of risk management may bring.

THE FIRST GENERATION

Those with memories of the earliest days of risk management credit Wayne Snider of Temple University with coining the term risk manager as early as 1955:

Snider was addressing a group of what were then called insurance buyers or sometimes insurance managers, and he pointed out to them that they were using the leverage of insurance premiums to bring about changes in risk. And he rightly said to them, 'You are not simply buying insurance or managing insurance, you are managing risks. …

Search by... Author
Show... All Results Primary Sources Peer-reviewed

Oops!

An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.